Russia’s second-largest oil producer, Lukoil, has reportedly signed a $6 million contract on two exploration and projects in Iran’s southern provinces, and word is already under way.

The news was reported by Iran’s Press TV, citing Hormoz Qalavand, the director for exploration affairs of the National Iranian Oil Company (NIOC).

The two exploration projects are located in the country’s southwestern oil-rich Khuzestan province, situated on the Persian Gulf and sharing a border with Iraq.

The Russian energy group is exploring the hydrocarbon reserves in Dasht-e-Abadan in Khuzestan and in the northern parts of the Persian Gulf, according to Press TV.

This isn’t Lukoil’s first venture into the Islamic Republic of Iran. Lukoil has worked in Iran since the early 2000s, and began work on the Anaran oilfield in 2003 as a minority partner along with Norway’s Statoil, but had to cease operations in 2010 when economic sanctions were imposed.

The Anaran oil field, which is located near the Iraqi border, has an estimated 2 billion barrels of recoverable oil reserves.

Anticipating the imminent lifting of Western sanctions against Tehran over its nuclear program, Lukoil reopened its office in Iran in April 2015.

Iran is home to the world’s fourth largest reserves of oil, which is very cheap to produce – only $10 per barrel.

Sanctions linked to Iran’s controversial nuclear program have barred it from developing or exporting oil or gas in recent years. Iran’s oil exports have dropped from 2.5 million barrels a day in 2011 down to just 1 million barrels in 2014, according to the US Energy Information Administration (EIA).

Until the lifting of sanctions exports, which went mainly to tChina, Japan, India, South Korea, and Turkey, amounted to about 1 million barrels a day, compared to pre-sanctions crude output of 3.6 million barrels per day in 2011.

Iran was allowed to resume selling oil to the US, EU, and its allies in January, after it agreed to take steps to wind down its nuclear program.

According to statements by the Iranian authorities, in the next six months, the country has the ability to bring 500,000 barrels of oil per day to market, and in a year, 1 million barrels of oil. The draft budget for 2016 provides for the export volume of 2.25 million barrels of oil per day.

Iran’s President Hassan Rouhani has repeatedly said that Iran will need foreign companies to invest billions into his country’s economy in order to give it a boost start.

The Kremlin has a soft spot for Iran, which up until January, had been subject to Western sanctions, bringing its oil industry to a near standstill.

Sanctions against Russia have its own economy hanging on for dear life. As a result, Moscow will have to make cuts and adjustments across the board, including, as noted by Deputy Finance Minister Sergei Storchak, loans to other countries, with the exception of Iran.

Energy giants in Russia will continue to feel the squeeze of low oil prices – which lost more than 46 percent in 2015 – in the new year. If oil prices remain below $40 and the world continues to produce more oil than it consumes, it’s going to be another cash-strapped year for Russian oil companies. Arctic drilling and other capital-intensive projects will be delayed in 2016. Russia’s celebrated pivot away from the West towards China and Iran will continue to be contradicted by its active efforts to expand its Nord Stream pipeline to Europe, which despite the rhetoric, is still Russia’s biggest customer. On the political side of things disputes with neighboring Ukraine seem to have at least cooled, but Russia is now focusing on Central Asian states’ dominance in energy, especially in relation to China.

Delays in Arctic drilling

State-owned Gazprom and Rosneft will have to continue to shelve their Arctic ambitions, due to low oil prices and sanctions imposed by the US and EU that ban companies like Exxon and BP from working with Russian partners.

As long as sanctions stick, Russian companies will be barred from access to both the equipment and investment dollars they need to carry out the projects in the Arctic. Both the EU and US renewed sanctions against Russia in late December 2015.

On the bright side, this could open up an opportunity for independent oil producer LUKOIL, which is developing the Kravtsovskoye deposit in the Baltic Sea, as well as a possible joint venture with Gazprom in the Medvezhe field in the Barents Sea. Kravtsovskoy’s reserves are estimated at 157 million barrels of oil, and the Medvezhe structure may contain 183 billion cubic meters (bcm) of gas.

More EU grumbling over Nord Stream

The expansion of Nord Stream, a pipeline that transfers Russian gas directly to Germany, would quickly and easily solve Gazprom’s dependence on delivering supplies through Ukraine. However, many EU members believe this will give Russia (as well as Germany) too much power over Europe’s energy market, and have already begun to fight it.

Once expanded, the pipeline, which runs along the seabed of the Baltic Sea, will have the capacity to deliver 110 bcm of gas, or about 2/3 of Europe’s total yearly demand. In 2014, Europe bought 146.6 bcm of gas from Russia.

Gazprom will build and operate the pipeline with Germany’s E.ON, BASF/Wintershall, Austria’s OMV, ENGIE of France, and Royal Dutch Shell to expand the pipeline.

If there are no unforeseeable delays, the expansions will be complete by 2020 and cost €10 billion, a manageable sum for Gazprom.

TurkStream

Negotiations on TurkStream, the pipeline that was meant to replace the canceled South Stream, have been on hold since the downing of a Russian fighter jet over Turkish territory in November.

Russia’s retaliation to the downing includes sanctions certain Turkish imports, limiting Turkish companies operations in Russia, and banning Turkish workers. With Turkish-Russian relations at a low, TurkStream is less likely to happen.

TurkStream would have initially have had the capacity to transport 63 billion cubic meters of natural gas from Russia to Turkey under the Black Sea.

Turkey imports about 80 percent of its gas from Russia, or about 28-30 billion cubic meters per year.

Gazprom has long touted its ‘mega deal’ with China to supply the superpower with 68 bcm of natural gas per year via two pipelines, the Power of Siberia, which will run from West Siberia to China and supply 38 bcm, and the so-called western route, which will traverse across the mountainous Altai region to Western China and deliver the remaining 30 bcm.

Both projects face financing issues. Construction costs of the Power of Siberia are estimated to be $55 billion, more than Gazprom is even worth.

Gazprom is trying to get China to put down capital to pay for the expensive pipeline project, but with China facing its own economic uncertainties, it isn’t a given Beijing will front the money.

The final finish date for the project (2019-2021) is vague and hinges on several factors: the development of gas fields, negotiations with Rosneft which wants access to the pipeline, financing, among other issues.

Turkmenistan

Any decisions on Gazprom’s deal with China will affect Turkmenistan, which supplies China with 25 bcm of natural gas annually, or nearly half of the country’s gas supply. Turkmenistan plans to deliver 25 bcm to China by 2020, and plans to build a pipeline to make this a reality.

Once dependent on Russian energy, Turkmenistan is now one of the major natural gas producers in the Central Asian region, and poses the biggest threat to Moscow.

Turkmenistan has the world’s fourth largest proven natural gas reserves, according to BP data, putting it behind Russia, Iran, and Qatar. Abundant in reserves, the country lacks pipeline infrastructure to move product.

2016 may be the year that foreign energy companies are allowed back into Iran, home to the world’s second largest natural gas reserves and fourth largest oil reserves, and where a barrel of oil only costs $10 to produce.

Iran is preparing to increase its oil exports, and already has 20-30 million barrels of crude oil in storage that could come to market the moment sanctions are lifted.

Implementation Day”, the date when the United Nations Security Council officially lifts the sanctions against Iran and trade can start, could come as early as January.

Gazprom, Lukoil, and Rosneft will likely get preferential contracts as a result of Moscow’s cozy relationship with Tehran, but will still have to compete with the likes of BP, Shell, and Total to reboot Iran’s oil and gas industry.

Iran’s current oil production is 3.1 million barrels per day and hopes to boost production to 5.7 million barrels a day by 2018. The increased supply will put downward pressure on prices.

More cordial relations with Ukraine

Expect the same negotiation and pricing antics as years past, but toned down to a palpable degree for the West, so Russia can play ‘the good guy’ in the Ukraine conflict.

Sales are already set for the first quarter of 2016 at a discount of $230 per thousand cubic meters, which is more a reaction to falling natural gas prices, and less of a sentiment of goodwill. Prime Minister Dmitry Medvedev signed the decree on New Years Eve that locks in prices for the first 3 months of the year.

Last year’s relatively mild winter allowed Ukraine to buy less gas from Russia, but that isn’t a given this year. This winter, they will continue to buy as much of their gas supply from European states as they can.

Until Russia completes another route to Europe, Ukraine will continue to collect its $2 billion in transit fees per annum.